Apple Bonds and Endless Mortgage Suits

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Apple, which had $193.5 billion of cash and marketable securities as of March 28, is now one of the biggest buyers of shorter-term debt sold by investment grade companies, often taking as much as $200 million of a $1 billion issue, according to four people with knowledge of the deals.

Google and Oracle and other big cash-rich tech companies are also major bond buyers, and:

As competition intensifies for bond allocations, tech companies are increasingly approaching other corporate borrowers to anchor new bond sales, or buy the biggest chunks, in what’s known as a reverse inquiry, the people said. They tend to get as much of the debt as they want because underwriters know they typically will hold it to maturity, giving borrowers confidence their deals will get done and maintain value in secondary markets, according to two underwriters with knowledge of the transactions.

Apple itself has issued about $40 billion of bonds itself in the last two years, and its bond investing seems to be concentrated at the short end ("Apple, Oracle and their peers have largely been buying investment-grade securities maturing in two to three years") and in the financial sector. If you squint this looks like sort of reverse banking: A large real-economy company borrows money long-term in order to lend it shorter-term to banks. Our financial system is weird, though to be fair the undercurrent here is that our tax system is weird: A lot of this complexity comes from the fact that Apple is keeping foreign earnings abroad to avoid paying taxes.

People are worried about bond market liquidity.

At the rate we're going this topic will need a newsletter of its own. Here is an article with the headline "Manchester United is calling the shots" and the deck "Bond deal a symptom of reduced secondary-market liquidity," and if that isn't a sign of a bond-market-liquidity-article bubble I don't know what is.

When we talked about this topic the other day (liquidity, I mean, not Manchester United), I said that the main worry in corporate bond markets seems to be about funds that buy and hold the same bonds and offer their investors daily liquidity. Here's Bloomberg's Lisa Abramowicz on the current selloff in global bond markets, pointing out that it's not as bad as it could be because "Investors have actually poured almost $1 billion into fixed-income exchange-traded funds over the past week." But those funds are fragile:

Investors in bond funds are more inclined to pull money when returns go negative than stock-fund buyers, according to an April paper by professors Itay Goldstein at University of Pennsylvania’s Wharton School of Business, Hao Jiang at Michigan State University and David Ng at Cornell University.

“Our empirical results suggest that corporate bond funds are prone to fragility,” they wrote. “The illiquidity of their assets seems to create strategic complementarities that amplify the response of investors to bad performance or other bad news.”

The counterargument, I suppose, is that most bonds aren't held by mark-to-market funds offering daily liquidity: Those funds are growing in importance, but insurance companies, governments, banks and households also hold a lot of bonds. And then of course there's Apple! Apple will save the bond market. That Apple story notes that the tech companies' buying "is raising concern that markets will weaken if they suddenly decide to do something else with their cash," but, you know, Apple's funding is a lot more stable than the average mutual fund's.

This article makes for grim reading: "The Justice Department and state officials, which already have reaped almost $37 billion from the largest U.S. banks, are now targeting U.S. and European banks" for more mortgage settlements, with Goldman Sachs and Morgan Stanley expected to sign multibillion-dollar settlements this summer, followed by Barclays, Credit Suisse, Deutsche Bank, HSBC, Royal Bank of Scotland, UBS and Wells Fargo. "The Justice Department could pursue settlements with large U.S. regional banks when these settlements are over." When I retire in 30 years, my last post will be about a Justice Department settlement with a tiny community bank that originated one bad mortgage in 2006.

There are two weird things going on here. One is that, as a society, we've decided that the entire American mortgage system in the mid-2000's, from origination through securitization to servicing and foreclosure, was systemically and universally corrupt, and that, in the American tradition, we're going to sue everyone involved for damages. The working out of that process -- finding every institution involved in the circa-2007 mortgage system and figuring out what each will have to pay -- will just necessarily be endless and tedious and bureaucratic. Really fairness demands that it not stop now: Sure JPMorgan and Citi and Bank of America did lots of bad mortgage things, and they've paid through the nose for it, but it wouldn't be fair to them if Morgan Stanley or RBS or Second Community Bank of Wherever get off without paying for their own lesser share of mortgage badness. So the process has to grind away until it's fully processed everyone. Sometimes three or four or seventeen times.

The other weird thing is that we've created a semi-permanent bureaucracy of prosecutors who can make careers out of extracting mortgage settlements from banks. These prosecutors pay for themselves (they're wildly profitable, really), they can tell themselves they're doing noble work ("The government has viewed the investigations as a way to hold the banks accountable for wrongdoing that led to the financial crisis"), and they have no reason to want this to end any time soon. So it probably won't.

It’s not the first time the Greek government has used obscure IMF rules to pay the international lender. But it is likely the last trick Athens has left to put off the inevitable reckoning with creditors.

I am no expert but, I mean, I don't know, there've been a lot of tricks? "While some progress has been made in recent days, Greece continues to resist certain conditions, particularly on politically difficult issues like pension cuts" is yet another sentence that you could have read any time in the last four months. Ironically: "After the meeting with Juncker and Dutch Finance Minister Jeroen Dijsselbloem, who also heads the group of his euro-area counterparts, Tsipras reiterated both sides can’t 'make the same mistakes, the mistakes of the past.'" Here are the dueling Greek and Troika proposals. Here is the Bloomberg View Greek default thermometer.

Peer groups.

Here is a pleasing series of interactive graphics about how companies compare their executives' pay to other, bigger companies' executives' pay, in a constant effort to increase all executives' pay:

“There is definitely a ratcheting effect,” says Bill George, the former CEO of Medtronic Plc and a member of Exxon Mobil Corp.'s board of directors. “The consultants come in and say, ‘These are your peers,’ and nobody wants to be in that bottom quartile. We thought transparency would be good, the sunshine would be helpful. Instead it created a competition that's unhealthy.”

Elsewhere, "SEC Staff Provides Additional Analysis Related to Proposed Pay Ratio Disclosure Rules," because people still think that transparency about executive pay will be good.

Stake 'n Shake.

We've talked a little before about Biglari Holdings, the company formerly known as Steak 'n Shake Co. but now renamed after its chief executive officer and biggest shareholder Sardar Biglari. Biglari, a "Warren Buffett wannabe" and activist investor, seems to view the company as an extension of himself, telling investors that a bet on Biglari the company is a bet on Biglari the guy. Thus the name change. Others disagree, and in April Biglari had to fend off a proxy fight from Groveland Capital at his own company. He won, but, apparently to prevent a repetition of such unpleasantness, he is now trying to increase his stake in the company from about 19.6 percent to about 47.5 percent, by means of a partial tender offer at about a 14 percent premium. I have to say that as a way to fend off activists, buying a near-majority of the shares is a pretty good one, much fairer than a poison pill anyway.

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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